OFF TO THE RACES

Corporate leaders are losing confidence in both parties as compromise remains elusive.

Listening: Obama lost the teleprompter this time with the Business Roundtable.(AP Photo/Charles Dharapak)

Even many of us who don’t believe the United States will be going over the fiscal cliff still worry about the fallout that will likely occur over the next four or five months. The U.S. and world economies are in an unusually fragile state, lacking the kind of resiliency that is needed to withstand shocks to the system. Indeed, anyone with a 401(k) or other investments should be bracing for a pretty exhilarating ride, with fits and starts as things look good, then look terrible, then cycle through again. The whole process could be stomach-churning.

Assume for a moment that a two- to four-month temporary spending patch is agreed upon, preventing sequestration—and assume that a temporary compromise is reached on higher tax rates. In that case there will still be damage to an already fragile U.S. economy. Indeed, many economists and others believe we are already seeing early signs of that damage.

While consumer confidence is up, business confidence is going in the opposite direction. It’s popular to say these days that business leaders are looking for certainty. That is no doubt true, but some of these feelings articulated by CEOs, CFOs, and other corporate leaders are really a nice way of saying that they are increasingly having little confidence in the political leadership of this country in both parties and that this lack of confidence, which goes far beyond the immediate fiscal-cliff and debt-ceiling issues, isn’t likely to go away until they see a fundamental change in behavior.

While the vast majority of major corporate leaders either backed Mitt Romney last year or stayed neutral, they don’t really see the Republican Party as the good guys and Democrats as the bad guys. They see the whole political and governing process as dysfunctional. They believe that even the smart, well-intentioned, and economically sophisticated policymakers on both sides of the aisle are rendered almost powerless by the extremists.

This, too, contributes to the leaders’ reluctance to hire, expand, and invest. Instead, they are hoarding cash or borrowing cheap money to have plenty of cash reserves in case things get really bad. The whole “Fix the Debt” movement is a rather extraordinary interjection of corporate leaders in a process that most would prefer to avoid. When I talk to these leaders, they say they really do worry that Washington has broken down.

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Economists are seeing this fallout. The just-released Dec. 5-6 Blue Chip Economic Indicators survey of 56 top economists shows the consensus forecast for economic growth (real gross domestic product) for 2013 slipping to 1.9 percent. The consensus for the fourth quarter of this year was 1.2 percent, and 1.6 percent for the first quarter of 2013. Meanwhile, the consensus forecast for the unemployment rate next year is 7.8 percent, roughly the same as the November figure of 7.7 percent reported on Friday. That November jobs report also listed the broader unemployment rate—which includes people who are working part-time but seeking full-time employment as well as those who have given up looking for work—as now standing at 14.4 percent.

Business leaders report that they’re frustrated with both Democrats and Republicans in Congress who see compromise as a four-letter word. And things hadn’t been much better at the other end of Pennsylvania Avenue, either. Most business leaders had seen few promising signs over the last four years that they were welcome at the White House for anything more than photo ops.

Some CEOs from the nation’s largest companies who were in town last week for the Business Roundtable meeting, however, were encouraged by their meeting with President Obama, which was considerably different from their first with him. After Obama took office, the president used a teleprompter in his meeting with the roundtable, took no questions, and had virtually no interaction with the titans of industry, in stark contrast to meetings with Presidents Clinton and Bush.

This time, Obama spoke using a handheld mic (no teleprompter), took questions, and behaved in a more conciliatory manner. Some of the CEOs took this as a good sign that perhaps things might change and there might be more interaction and—more importantly—listening on the part of the White House.

While the policy outcomes of the current budget fight are obviously incredibly important, people should keep in mind the optics: How do business leaders and investors perceive these events? Do those who make the decisions to hire, expand, lay off, and contract, as well as those who decide to buy or sell—with enormous consequences for retirement accounts and pension funds—see the system as functioning? Their daily votes of no confidence hurt us all.